Carlyle Inc.is considering two mutually exclusive projects.Both require an initial investment of $15,000 at t = 0.Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1 and 2,respectively.In addition,Project S can be repeated at the end of Year 2 with no changes in its cash flows.Project L has an expected life of 4 years.Each project has a WACC of 9%.What is the equivalent annual annuity of the most profitable project?
A)$569.67
B)$792.34
C)$865.31
D)$1,522.18
E)$1,846.54

Question

Carlyle Inc.is considering two mutually exclusive projects.Both require an initial investment of $15,000 at t = 0.Project S has an expected life of 2 years with after-tax cash inflows of $7,000 and $12,000 at the end of Years 1 and 2,respectively​.In addition,Project S can be repeated at the end of Year 2 with no changes in its cash flows.Project L has an expected life of 4 years.Each project has a WACC of 9%.What is the equivalent annual annuity of the most profitable project?
A)​$569.67
B)​$792.34
C)​$865.31
D)​$1,522.18
E)​$1,846.54

Quizplus · Accepted Answer

The equivalent annual annuity (EAA) is calculated by first determining the net present value (NPV) of each project and then converting it into an annuity over the project's life. Project S can be repeated, so its NPV is calculated for 4 years. The EAA of Project L is calculated over 4 years. The project with the higher EAA is the most profitable.